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The world's largest Internet retailer Amazon.com, Inc. (AMZN - Analyst Report) will start shipping the front-lit Kindle Paperwhite around the end of this month, intensifying the competition with Barnes & Noble’s (BKS - Snapshot Report) Nook Glowlight.

The Paperwhite is Amazon’s fifth generation e-book reader. Amazon went back to the drawing boards and made certain changes to the e-book reader. For example, Amazon itself develops the display in Paperwhite. The higher contrast ratio makes Paperwhite a visual treat for readers. On the hardware front, Amazon removed all the buttons except the home button. This has made the device lighter and thinner.

However, Barnes & Noble took a different route as their device has buttons on either side of the screen. Nonetheless, both these devices are backlit, which helps to brighten up the screen. Also, one can reduce or increase the light while reading.

On the connectivity front, Paperwhite supports both WiFi and 3G. Barnes & Noble on the other hand has equipped their Nook with just WiFi. Amazon seems to be far ahead in the race as the collection of Amazon’s e-books is the largest. Amazon also attracts new authors and has its own digital publishing unit, both of which further promote its platform.

Amazon’s constant upgrading of its e-book reader is surely benefiting customers. However, while Amazon may have the best e-reader, Apple’s (AAPL - Analyst Report) certainly has the best tablet. Despite the fact that the Kindle has acquired many new features over the years, its not a full-blown tablet yet. Therefore, given that the tablet market is far larger than the e-reader market, Amazon’s Kindle is unlikely to catch up with Apple’s iPad any time soon.  Additionally, the market continues to heat up with other tablets such as Microsoft’s (MSFT - Analyst Report) Surface and Google’s Nexus.

Analysts are expecting the e-book market to reach $5.2 billion by 2016 in the U.S. alone. The e-book market has witnessed unprecedented growth, as both authors and readers have benefited from it. Amazon, through its Kindle reader and Kindle apps is currently the leading seller of ebooks. However, if the company is unable to build further on its Kindle or slash prices drastically, it could see its share of overall book spending decline. In the first quarter of 2012, the company accounted for 29% of book spending in the U.S., followed by Barnes & Noble at 20%. 

However, current trends seem to indicate that consumers increasingly prefer multi-purpose devices (aka tablets) for book-reading, which means there is a real danger that interest could move from reading to watching movies or listening to music. Tablets have changed the scenario of reading a book as now consumers have access to their libraries of music, movies and books anywhere and at anytime.

Amazon’s second quarter results were more or less within expectations. Reported revenue of $12.83 billion was down 2.7% sequentially and up 29.5% from the year-ago quarter. This was better than the guidance for the quarter of $11.9-13.3 billion (down 4.4% sequentially, or up 27.1% year over year at the mid-point) and in line with consensus expectations. Year-over-year revenue growth was 32%, excluding an unfavorable currency impact.

Currently, Amazon has a Zacks #3 Rank, which implies a Hold rating in the near term.

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